White-box server sales increased by 94 per cent this year, and accounted for 7.2 per cent of all server shipments

Branded server sales declined three per cent in the last quarter, the fourth consecutive quarterly decline according to new data published by research and analysis firm IDC. But while server revenues for big players like IBM, Oracle and Cisco continue to decline, increased adoption of cloud services could accelerate the rise of original design manufacturers (ODM) as cloud service providers seek lower cost avenues for achieving scale.

It may come as no surprise that sales of branded servers have continued to decline as we approach 2014. Revenue in the EMEA server market reached $2.8bn in the third quarter this year, a decrease of three per cent when compared with the same quarter last year, and shipments, which reached 535,767 units, declined by just under fiver per cent annually.

“CISC [complex instruction set computing] was the only non-x86 category that showed moderate revenue growth of 8.1 per cent, which is mainly down to larger hardware refreshes but also the specific use cases for CISC that are less exposed to x86 migration than most RISC [reduced instruction set computing] systems,” Giorgio Nebuloni, research manager, enterprise server group at IDC . “However, non-x86 technologies will continue to be eroded from migration to x86, and we believe it is unlikely sales will ever return to pre-recession levels.”

Nebuloni said that in Western Europe most server demand came from companies building out large-scale datacentres, cloud service providers like Rackspace and Salesforce for instance.

As businesses shift to using these services they rely less and less on the on-premise servers big vendors have been pushing for the past 30 years. But that trend, which has prompted big legacy kit vendors like IBM and Oracle to offer more of their core software products via the cloud, in part to offset those declines, is also encouraging the rise of the original design manufacturer (ODM). Companies like Quanta Computer, Hon Hai Precision, Wistron, and Compal have gained traction in the hyperscale world because they sell boxes and server assembly parts direct and to spec, cutting out the middle men – the HPs, Dells and IBMs of the world – for whom they also manufacture products.

ODM direct sales server revenue grew 94.7 per cent year on year in the third quarter this year to reach $69.8m, and unit shipments increased 74 per cent to 38,589 servers. ODM servers represent 2.5 per cent of all server revenue and 7.2 per cent of all server shipments, a small but quickly growing chunk of the overall server market. Almost 80 per cent of ODM revenue came from the US, primarily from players like Google, Amazon and Rackspace.

“As cloud services keep growing in importance, it is crucial to recognize the trend and size the impact of new purchasing models for datacentre compute capacity, primarily for high-growth business-to-consumer web players and, partly, for infrastructure-as-a-service providers,” said Nebuloni.

Part of the trend can be explained by the fact that service providers are increasingly looking to tweak the hardware for their specific needs, which can be costly if explored through traditional channels. The Open Compute Project, which counts cloud service providers like Rackspace, Facebook, NTT, and Orange as members, seeks to create commodity server designs and open source datacentre reference architectures that reduce failure rates and costs dramatically; the designs are tested by the participant community and made publicly available – so anyone can nab the specs and build to them.

Still, Nebuloni explained that the speed at which the shift to white-box adoption is occurring is somewhat overhyped. Beyond the hyperscale players most server revenue comes from enterprise and public sector segments, where sales still typically go through traditional channels. These segments also tend to require robust customer support, which ODMs – as the manufacturers for vendors – have traditionally left to the big established IT vendors. This is slowly changing – Quanta, for instance, has invested in new service and support-focused subsidiaries in the US; but despite increased adoption among cloud service providers it will likely take years for companies like IBM and Cisco to be displaced in the server space, if at all.

“Also, and contrary to what happens for example in mobile devices, shifts in the datacentre area tend to develop much more gradually, over years instead of quarters, which allows incumbents to reposition and prepare fight-back initiatives to capture growth areas whenever they can,” Nebuloni concluded.